Scary Bear Flag Implications (NASDAQ, SPX, DJIA)
Over the weekend I was browsing through Technical Analysis of Stock Trends by Edwards and Magee, and I found myself researching bear flags. I had noticed this pattern forming on the major indexes and discovered something quite disturbing about how this chart pattern typically plays out.
All three charts below look identical with the major breakdown coming in September and over the past few months we’ve been consolidating in a bear flag. So If you look at this pattern you could break it into 3 sections with them being:
- First fall
- Bear flag (consolidation)
- Second fall
From Technical Analysis of Stock Trends it reads regarding flags and pennants, “This type of pattern is fairly common in fast moving markets. The extraordinary point about flags and pennants (and sometimes other consolidation patterns in fast moves is their tendency to form almost exactly halfway between the bottom and the top.”
Should we just be halfway through the current move down as this analysis is suggesting we are a long way from the bottom. Doing some rough calculations as it never is going to be exact in the face of a potential mammoth wave of selling that could be coming, here is the rough estimates. Remember that tops and bottoms tend to overshoot the analysis, so it’s likely to add another 2-3% for downside slippage. Potential final bottoms:
- NASDAQ – 750
- S&P 500 – 475
- Dow Jones – 5600
One aspect to this analysis that jumps out at me is that the Dow could be showing some relative strength in all of this selling should these projections hold up. I tend to think that makes sense as there always has to be some money in the markets and they (mutual funds, retirement accounts) most likely will be in dividend paying stocks that are safe near a market bottom. Techs would be wrecked with it showing another 50% loss from last Friday’s closing levels and the SPX would a be near 40% drop.
No matter when the bear market ends I think most veteran traders know this has a long way to go and these projections could be a big enough drop to satisfy the hungriest bears out there.
And while I’m not going to base any of my trading decisions on a chart forecast as I’m not one to say the market is going to do this or that next year, however I did find this analysis interesting and thought I’d share it.
This was a guest post by Jeff Pierce (Track his trades on Covestor.com). Jeff is a full time trader based out of Vancouver Canada. Read his blog at zentrader.ca.
